5 Must Ask Questions Before You Apply for a Business Loan￼
Many business owners often apply for a business loan without any clear objective of how much they want and how to utilise the money.
If you are planning to fund your business with a loan, consider asking the following questions before applying. It will help you get a clear idea about the borrowing and repayment procedure.
Top 5 Questions to Ask Yourself before Applying for a Business Loan
Before applying for a business loan, you should know the answers to the following questions:
- What are The Basic Documents Required to Apply for a Business Loan?
The basic documentation requirements that you need to fulfil while applying for a business loan may vary from one lender to another. Multiple banks, NBFCs, and microfinancing institutions lend business loans to finance small or micro businesses. Considering the variation of lending institutions, there can be some differences in the documents required. However, the basic requirement involves the following:
- Identity Proof
- Address Proof
- Income Proof
- Bank Statement
- Business Plan
- Proof of Continuation, etc.
Many loan application processes get delayed due to a lack of understanding between the lender and borrower. So, while applying for a business loan, make sure you communicate with your lender to find the accurate list of documents that you need for the loan.
- What are the Factors Influencing Business Loan Interest Rates?
There’s hardly any borrower who wouldn’t prefer borrowing a substantial amount at lower interest rates. However, interest rates on your loan amount vary depending on several factors. Here are some of the key factors that influence your business loan interest rates:
- Annual Turnover
If your business produces a higher annual turnover, the lending institution will impose a lower interest rate, considering you can repay comfortably. A higher annual turnover implies you run a healthy business and can repay the loan on time.
- Business Nature
Business nature is one of the crucial factors that determine the interest rate on your loan amount. If you run a structural business in the right industry, the chances of acquiring a lower interest rate on your business loan is high. This is because your business nature indicates your credibility. Businesses in sectors that are considered risky or highly cyclical will attract higher interest rates for loans.
- Repayment History
Repayment history plays a major role in determining your loan interest rate. When the lender finds that you and your business have a credible history of repaying debts, they will lower the interest rate on your loan amount.
- Do I Need a Good Credit Score to Apply for Business Loans?
A potential borrower should maintain a high credit score to apply for business loans. The Credit Information Bureau Ltd. creates credit scores for borrowers. So, it is also known as the CIBIL score. This score ranges between 300 and 900.
A higher score above 750 indicates that you have maintained a good credit history. Paying out your outstanding debts on time helps maintain your creditworthiness. Thus, lenders prefer borrowers with a high credit score as there are lower chances of them being defaulters.
- Why do I Need to Finance My Business?
Financing your business from an external source can help you upgrade or develop the business structure for enhanced profitability. However, understanding the need of financing your business is very important. You need to have a clear objective behind raising funds for the business.
If you are not sure about how much you need to borrow or how you want to utilise the borrowed money, it may affect the repayment procedure. There are multiple business loan options based on various requirements. So, be assured of your purpose and apply for a convenient option.
- What are The Advantages of a Business Loan?
Every business requires funding after certain intervals to enhance its growth and development. You can opt for multiple financing options but using a business loan can be the smartest decision, considering its advantages. You can opt for unsecured business loans, where you need not pledge any collateral while borrowing.
The application and approval process does not take much time, given you have provided the required documents. Next, a profitable business with considerable annual turnover can borrow a business loan at lower interest rates. Last but not least, business loans come with flexible repayment tenures.
Top 5 Business Loans in India
There are several types of business loans in India to cater to the financial requirements of business organisations. Moreover, the government has also come up with multiple business loan schemes for start-ups and small-scale businesses to boost the country’s economy. Here are the top 5 loan schemes that you can consider to uplift your business:
- Start-Up Loans
Start-Up loans are exclusively for new business ventures. You can borrow a start-up loan if you are planning to set up a new business. Considering the new setup, lenders do not count the credit history and profitability of the borrower but you need to propose an expected turnover. Your loan amount, tenure, and interest rate will be decided based on that figure.
- Business Loans for Women
Valuing the contribution of women entrepreneurs in the Indian economy, financial institutions have come up with multiple loan schemes for women. The Government of India also initiated business loan schemes like Udyogini, MUDRA loans for women, etc. These loans offer attractive features like lower interest rates, flexible tenures, seamless approval, etc.
- Term Loans
Most lending institutions offer term loans with a tenure of 1-5 years to finance the borrower’s business. You need to provide a clear objective and have a higher credit score to apply for a term loan. Maximum borrowers avail of term loans to cover their capital expenses. You can avail of a substantial amount depending on your creditworthiness.
- Equipment Financing
Equipment financing is a secured loan where you need to pledge your machinery as collateral. Business organisations that manufacture products and goods can opt for this financing option. With this loan, you can buy advanced equipment to run the operation smoothly and effectively. And as this loan is a secured loan, interest rates will be more attractive compared to unsecured loans.
- Business Credit Card
Business credit cards are instant financing options for short-term requirements. Moreover, you can avail a bunch of attractive benefits like insurance covers, cash back, etc. on a business credit card. However, make use of the card wisely as the interest rates for using credit cards are much higher than other financing options.
So, before you apply for a business loan, make sure to ask these important questions. This will help you to make an informed decision. All you need to do is manage your outstanding debts to maintain a good credit history and arrange the documents accordingly. It will help you avail of business loans at attractive interest rates and convenient loan terms.
What should be my minimum credit score to apply for a business loan?
Credit score plays a crucial role in determining your loan eligibility. Generally, a higher credit score ensures your creditworthiness. Lenders prefer a minimum credit score of 700-750 while approving a business loan.
What is the difference between the interest rates charged by banks and NBFCs?
Banks offer a lower interest rate as compared to NBFCs. Bank rates for business loans range between 6% to 24%. However, NBFCs lend business loans at an interest rate between 10% to 36%.
Are business loans collateralized?
Business loans can be both secured and unsecured. Unsecured loans are not collateralized. You can avail of government business loans if you are looking for a collateral-free loan scheme. However, for secured business loans, you need to pledge an asset.
How long will it take if I apply for a business loan online?
Online business loan application ideally takes a few minutes to process. As the online application process does not require any paperwork hassles, you can complete the form and submit the application instantly. The loan verification and disbursal also take less time.